Is gasoline undertaxed in the united states?
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is gasoline
undertaxed in the
united states?
Ian W.H. Parr y
Even though the environmental and public safety benefits from higher taxes could be
substantial, the United States has the lowest gasoline tax among industrial countries
for a number of reasons.
to reduce local air pollution, carbon dioxide emis-
G asoline taxes vary dramatically across
different countries. While the United
Kingdom has a gasoline tax equivalent to $2.80
sions (a greenhouse gas), traffic congestion, traffic
accidents, and oil dependency. Taxing gasoline is
per gallon, the highest among industrial countries, one way of forcing people to take into account the
the United States has the lowest tax of 40¢ per gal- social costs of these problems when deciding how
lon (18¢ federal tax and on average about 22¢ much, and what type of vehicle, to drive.
state tax) (see Figure 1). It is commonly thought Gasoline taxes also provide a source of gov-
that Europeans have a greater tolerance for high ernment revenues. In Britain, gasoline tax
fuel taxes than Americans, as they have shorter revenues are several times highway spending, and
distances to travel and better access to public the Labour government has argued that if gasoline
transport, although the fuel tax protests in taxes are reduced, schools and hospitals will have
Britain in September 2000 suggested that the to close. But this argument is somewhat mislead-
political limits of such taxes might have been ing as the revenues could always be made up
reached. through other sources, such as income taxes. The
A number of arguments are made for imple- real issue is what level of gasoline taxation might
menting high gasoline taxes. By discouraging be justified when account is taken of the full social
driving and fuel combustion, gasoline taxes help costs of driving, and the appropriate balance
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between gasoline taxes and other taxes in raising rev- and Camilla Kazimi (University of California–Irvine),
enues for the government. pollution damages are around 2¢ per mile (after
updating to 2000), or about 40¢ per gallon, though
ENVIRONMENTAL EFFECTS there is still much uncertainty over these estimates.
Gasoline combustion causes local air pollution, Economists have also attempted to assess the
notably smog and carbon monoxide. This pollution potential damage from carbon emissions, such as the
can reduce visibility, but its main harm is to human economic damage to world agriculture from future
health. For example, poor air quality can exacerbate climate change and the costs of protecting valuable
respiratory problems and lead to premature mortality. coastal regions against rising sea levels. These esti-
Economists have assessed the damages caused by air mates are highly speculative; for example, it is
pollution using epidemiological evidence on the link difficult to value the ecological impacts of climate
between air quality and human health, and studies esti- change, to allow for the small possibility of cata-
mating people’s willingness to pay to reduce risks of strophic climate change from instabilities within the
adverse health effects. Damage estimates have fallen climate system, and there is much controversy over
over the last 20 years or so as the vehicle fleet has the appropriate discount rate to use for converting
become cleaner, at least partly in response to emis- future damages into current dollars. A typical esti-
sions-per-mile regulations that are imposed on new mate from the literature is around $25 per ton of
vehicles. According to a recent study by Kenneth Small carbon, which translates into only 6¢ per gallon,
though some studies obtain much higher numbers.
FIGURE 1 These preliminary figures suggest that advocates of
higher transportation taxes to reduce carbon emis-
G A S O L I N E E XC I S E TA X E S
I N DI FFE R E NT COU NTR I ES sions may be on weak ground. Their efforts might be
better spent focusing on reducing combustion of
300 other fossil fuels, particularly coal.
United Kingdom
Germany
France
250
U .S . C E NTS P E R G AL LO N
Japan
TRAFFIC CONGESTION AND ACCIDENTS
Italy
200
Raising gasoline taxes nationwide is not well
Spain
suited to addressing traffic congestion, which is spe-
Australia
150
New Zealand
cific to certain roads in urban centers at particular
United States
Canada
100 times of day. Gasoline taxes do encourage people to
use public transportation and to car-pool, but they also
50 penalize driving on uncongested roads, such as in
rural areas or urban centers on weekends. A much bet-
0 ter way to alleviate congestion on, say, I-66 in the
northern Virginia suburbs of metropolitan Washington,
Source: Parry and Small, 2002 DC, would be to charge people to drive on the road at
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peak periods. (This could be done electronically by ical expenses) but also the personal or “quality-of-life”
deducting from a pre-installed credit card on the wind- costs; economists usually measure people’s willingness
shield). Time-of-day pricing would be more effective at to pay for improved safety at the equivalent of several
reducing congestion than gasoline taxes as it would million dollars per fatality avoided.
encourage people to use busy roads at off-peak periods
It is very tricky to decide what portion of accident
and look for alternative routes. With regard to acci-
costs individuals might take into account in their driv-
dents, it would be better to tax a driver’s annual
ing decisions, and what portion they might not
mileage, taking account of vehicle type and personal
consider. It seems plausible that people will take into
characteristics (such as experience and prior crash his-
account the injury risks to themselves (and other occu-
tory). And raising the penalties for drunk drivers
pants of their vehicles), and some of the property
would be a more direct way to reduce alcohol-related
damage if they anticipate higher insurance premiums
crashes.
in the event of a crash. Most likely, they will not take
Nonetheless, peak-period fees and mileage into account the costs of traffic delays or the injury risk
related taxes have not been widely implemented in the to pedestrians.
United States (though there have been limited experi- Whether one person’s driving raises the accident
ments with congestion pricing in California and risk to other drivers is not clear: the frequency of colli-
Texas). Gasoline taxes might be the next-best response sions rises with more traffic, but, if people drive more
for curbing congestion and accidents, so it is still slowly or more carefully in heavier traffic, a given acci-
appropriate to consider congestion and accident bene- dent will be less deadly. Based on earlier work by Mark
fits in an overall assessment of gasoline taxes. For Delucchi (UC–Davis) and the U.S. Federal Highway
congestion, this would require estimating marginal Administration, Kenneth Small and I put the average
congestion costs averaged across both urban and rural accident externality at around 3¢ per mile (60¢ per
roads and peak and off-peak travel periods, for the gallon) for the United States, although there is a wide
whole United States. Congestion costs are measured by range of other plausible estimates.
the extra time it takes to drive under congested condi-
Adding up the tally of the costs of driving that
tions compared with free-flowing traffic, multiplied by
individuals do not take into account gives a total, so
the monetary value of travel time (usually taken to be
far, of $1.76 per gallon, which is a substantial amount
about half the market wage). Based on the available
(though the uncertainty and controversy surrounding
evidence, Kenneth Small and I concluded that the best
damage estimates should be borne in mind). However,
estimate for the “averaged” congestion cost is about
a major problem with the gasoline tax is that it taxes
3.5¢ per mile, or 70¢ per gallon.
fuel rather than distance traveled. Over the long haul,
The cost to society from traffic accidents largely it is estimated that roughly 60% of the tax-induced
depends on human fatalities and injuries—in the reduction in gasoline will be from improvements in
United States around 40,000 people are killed on the fuel efficiency (people buying smaller cars, retiring
roads each year. Other costs include traffic hold-ups older, fuel-inefficient cars more often, etc.); only about
and property damage. The costs of fatalities and 40% will come from people driving less. For each gal-
injuries include not only economic costs (such as med- lon of gasoline reduced by fuel taxes, the accident and
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congestion benefits are only 40% as large as they dents. Kenneth Small and I calculated this component
would be if all of the reduction in fuel were due to of the optimal tax at roughly 20¢ per gallon for the
reduced driving and none to improvements in fuel United States.1
efficiency. Since imposing fuel taxes also creates eco-
Taking account of both the revenue-raising bene-
nomic costs by altering travel behavior, this reduction
fits and the benefits from reduced fuel consumption,
in benefits results in the optimal tax being smaller by a
the optimal gasoline tax is just over $1 per gallon for
similar portion. Adjusting the above figures reduces
the United States, according to our estimates, though
the appropriate gasoline tax to less than a dollar.
the estimate is sensitive to different assumptions and
may change over time. This is 2.5 times the current
U.S. gasoline tax, but still less than half of the current
GASOLINE TAXES AS PART OF THE OVERALL tax rate in the United Kingdom.
TAX SYSTEM
It is often thought that low-income groups
Gasoline taxes also provide revenues for the gov- bear a disproportionate burden of gasoline taxes,
ernment and this raises the issue of whether the ability although the actual evidence on this is more mixed.
to provide revenues constitutes a reason to set higher For example, a study by James Poterba (MIT) found
levels of taxation than warranted on the grounds of that spending on gasoline as a share of total household
pollution, congestion, and accidents. Leaving aside expenditure was only slightly lower for the richest 10%
other considerations, whether it is better to finance of households than for the poorest 10%, and the gaso-
some of the government’s budget through gasoline line expenditure share was highest for middle-income
taxes or not depends on the economic costs of gaso- groups. In my view, gasoline taxes should mainly be
line taxes compared with other taxes, such as income evaluated by weighing their overall economic benefits
taxes. Income taxes lead to economic costs or “excess and costs. Distributional concerns are much better
burdens” because they distort the overall level of addressed through altering the progressivity of the
employment in the economy; for example, by reducing income tax system, or providing a safety net through
take-home pay they reduce the labor force participa- the benefit system.
tion rate of married women. Gasoline taxes cause
economic costs by changing travel behavior and raising
transportation costs for businesses. OTHER ARGUMENTS FOR GASOLINE TAXES
Economists usually find that it is less costly to raise The September 2001 terrorist attack, the recent
revenue from taxes with very broad bases, such as debate in the House and Senate over competing
income taxes, than narrowly focused taxes on specific energy bills, and fears about a resurgent Organization
products that are easy to avoid by spending on other of Petroleum Exporting Countries (OPEC) have
products. However, exceptions to this rule are prod-
ucts whose demand is relatively insensitive to price,
1 This calculation assumes that extra gasoline tax revenues would substitute for income tax revenues,
which is the case for gasoline. Consequently, some
leaving total public spending the same. If extra revenues instead financed more highway spending,
level of taxation might be appropriate, in excess of that the optimal gasoline tax could be higher or lower, depending on whether the social benefits of
justified for curbing pollution, congestion, and acci- the extra spending were larger or smaller than the social benefits of lower income taxes.
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heightened concerns about U.S. dependency on increase in world oil prices would provide strong
imported oil, particularly from the Middle East. Oil incentives for other OPEC members to defect and sell
dependency makes the U.S. economy vulnerable to to the United States, or for non-OPEC suppliers such
volatile oil prices that might result from deliberate as Canada, Russia, and Mexico, to increase production.2
exercise of market power or changes in world market
Another consequence of motor vehicle driving is
conditions. However, the United States will always be
the wear and tear on the road network that must be
vulnerable to oil price fluctuations—regardless of how
repaired at taxpayers’ expense. However most of the
much it imports from the Middle East—because the
damage is caused by heavy trucks rather than autos:
domestic price of oil is determined by the world price.
road damage increases exponentially with a vehicle’s
The only way to reduce the economic disruptions from
axle weight so that a truck weighing 10 times as much
volatile world oil prices is to reduce the oil intensity of
as a car does one thousand times the damage. This
the U.S. economy.
problem really calls for a tax on diesel fuel rather than
In principle, an economic argument can be made gasoline or, better still, a tax on truck mileage adjusted
for some level of gasoline taxation on the grounds of for axle weight.
macroeconomic vulnerability, although a broader oil
There is a range of other unintended consequences
tax would be a more appropriate policy. Changes in oil
associated with the production, transportation, and use
prices can impose costs elsewhere in the economy that
of gasoline, including the costs of oil spills, leakage
are not taken into account by energy producers and
from storage tanks at refineries, and disposal of non-
consumers. For example, it is costly in the short term
recycled cars. However, the costs involved tend to be
for other firms to adjust their capital stocks in response
small in magnitude relative to those of congestion,
to sharp, and unforeseen, swings in oil prices. A recent
accidents, and pollution, and they are better dealt with
report on fuel economy standards by the National
by policies other than higher gasoline taxes.
Research Council put the economic cost of our
dependency on foreign oil at less than 12¢ per gallon.
Some people argue that we need to maintain a THE POLITICS OF TAX REFORM
larger military in order to ensure uninterrupted oil
Congress has ducked the issue of whether to raise
supplies from the Middle East. The amount of extra
the Corporate Average Fuel Economy (CAFE) stan-
military expenditure is tricky to assess; for example
dards, which impose minimum miles-per-gallon
some Middle East military spending is to protect the
requirements on sales of new vehicles, and left the
security of Israel. Moreover, most research, for exam-
National Highway Traffic Safety Administration to
ple a study by Douglas Bohi and Michael Toman at
review and recommend new standards. The argument
RFF, suggests that we may not need to spend more to
ensure a continued supply of imports because it would
be hard for Middle East countries to prevent other 2 It could also be argued that the United States could raise gasoline taxes to take advantage of its
market power in world oil markets. Effectively some of the burden of the tax increase would be
countries they supply from redirecting oil to the
borne by Middle East suppliers in lower world oil prices. This argument calls for an oil import
United States. Even if they were successful in stopping tariff rather than a gasoline tax; however, it might do more harm than good by provoking retaliatory
such shipments to the United States, the sharp tariffs against the United States.
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for tightening the CAFE standards is to address some For More Information:
of the factors discussed above, particularly greenhouse Most of the above discussion is based on Ian W.H. Parry and
gases and oil dependency. However a much more Kenneth A. Small, “Does Britain or the United States have the
effective policy to address these two concerns would be Right Gasoline Tax?” RFF Discussion Paper 02-12, 2002,
to raise the federal gasoline tax. Higher gasoline taxes (www.rff.org/disc_papers/PDF_files/0212.pdf, accessed July
19, 2002).
would reduce fuel consumption not only by encourag-
ing the development of more fuel-efficient vehicles,
For an excellent, non-technical discussion see Richard Porter.
but also by encouraging people to drive cars rather
1999. Economics at the Wheel: The Costs of Cars and
than sport-utility vehicles and minivans, to buy new
Drivers. New York: Academic Press.
(more fuel-efficient) vehicles more often, and to
reduce the overall amount of mileage. Indeed, tighter
CAFE standards would lower the cost per mile of driv-
ing, and could worsen some of the other problems
discussed above, such as traffic congestion.
However, substantially higher taxes on motorists are
not on the political radar screen for the foreseeable
future; despite a major effort in 1993, the Clinton admin-
istration was able to raise the federal gasoline tax by only
4¢ per gallon, and the rate has remained unchanged
since then. Nonetheless, there is considerable scope for
reducing the social costs of driving, without increasing
the overall burden of taxation to motorists as a group.
For example, opposition to local peak-period pricing
schemes—which are much more effective at reducing
congestion than gasoline taxes—might be dampened
somewhat by returning revenues collected to motorists in
the form of lower state gasoline taxes. ■
Ian W.H. Parry is a fellow at RFF. The author is grateful to Joel Darmstadter,
Felicia Day, and Ken Small for their helpful comments.
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